St. Louis Fed's Review:Rising Natural Gas Prices and Real Economic Activity; The Transition to Electronic Communications Networks in the Secondary Treasury Market; What Are the Odds? Option-Based Forecasts of FOMC Target Changes; Money and Monetary Policy for the Twenty-First Century; Chinese Growth: A Source of U.S. Export Opportunities

11/2/2006

ST. LOUIS — The November/December issue of Review, the Federal Reserve Bank of St. Louis' journal of economic and business issues, features the following articles. The publication is also available on the St. Louis Fed's web site: www.stlouisfed.org.

"Rising Natural Gas Prices and Real Economic Activity." Hurricanes Katrina and Rita caused, in large part, natural gas prices to rise to record levels. Because many manufacturing industries and electric utilities are heavy consumers of natural gas, there was concern those price increases could cause have a significant effect on the U.S. economy. Analysis by economist Kevin L. Kliesen suggests that in terms of effects on real GDP growth, crude oil prices are more important.

"The Transition to Electronic Communications Networks in the Secondary Treasury Market." Advances in information technology in the last 15 years have revolutionized electronic tradingposting quotes, transacting and confirming orders. Electronic methods have grown to dominate trading in major asset markets, such as equities, foreign exchange and, most recently, U.S. Treasuries. Economists Bruce Mizrach and Christopher J. Neely review the history of electronic trading and analyze a new bond market data set from eSpeed, an electronic trading platform. They contrast the market microstructure of the eSpeed trading platform with traditional voice-assisted networks that reported through GovPX. Mizrach and Neely find that eSpeed has greater volume, smaller spreads and a lower estimated impact of a trade. They conclude that lower spreads can benefit smaller traders by lowering their costs of portfolio rebalancing, while smaller market impacts ensure that institutional investors get similar benefits.

"What Are the Odds? Option-Based Forecasts of FOMC Target Changes." Economists William R. Emmons and Christopher Neely and researcher Aemit K. Lakdawala use probability forecasts derived from options to assess evolving market uncertainty about Federal Reserve monetary policy actions in a variety of recent episodes. Options on federal funds futures contracts imply a complete probability density function over possible Federal Reserve target rates, thereby augmenting the expectations provided by federal funds futures contracts. They find that option-based forecasts are useful when more than two federal funds targets are plausible outcomes at an upcoming meeting of the Federal Open Market Committee.

"Money and Monetary Policy for the Twenty-First Century." This article by economist Jerry L. Jordan, former president of the Federal Reserve Bank of Cleveland, was presented, in part, as the Homer Jones Lecture on March 8, 2006.

"Chinese Growth: A Source of U.S. Export Opportunities." This is a reprint of a speech delivered on July 31, 2006, by William Poole, the president of the Federal Reserve Bank of St. Louis, to the Fiscal Affairs and Government Operations Committee, Council of State Governments' Southern Legislative Conference in Louisville, Ky.

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